UK Tax for Business Owners: How to Pay Yourself Efficiently

If you run a business in the UK, you may be wondering how to pay yourself in the most tax-efficient way. There are different options available depending on the legal structure of your business, such as sole trader, partnership, or limited company. In this article, we will focus on the tax implications of paying yourself as a limited company owner.

Salary vs Dividends

One of the main advantages of running a limited company is that you can choose how to pay yourself: either as an employee (salary) or as a shareholder (dividends). Both options have different tax rates and rules, so it is important to understand the pros and cons of each one.

Salary

If you pay yourself a salary, you will have to register yourself as an employee of your company and set up a payroll system. You will also have to pay income tax and National Insurance contributions (NICs) on your salary, as well as employer’s NICs for your company. The tax bands for tax year 2023-24 are as follows:

• tax-free personal allowance: up to £12,570

• basic rate: 20% on income between £12,571 and £50,270

• higher rate: 40% on income between £50,271 and £125,140

• additional rate: 45% on income over £125,140

The NICs rates for tax year 2023-24 are as follows:

• employee’s Class 1 NICs: 12% on earnings between £9,100 and £50,270 (from 6 April 2023 to 5 January 2024, going down to 10% from 6 January 2024 to 5 April 2024, further reduced to 8% from 6 April 2024), and 2% on earnings over £50,270

• employer’s Class 1 NICs: 13.8% on earnings over £9,100

The main benefit of paying yourself a salary is that it counts as a tax-deductible expense for your company, meaning that it reduces your corporation tax bill. The corporation tax rate for tax year 2023-24 is 19% for profits up to £50,000, and 25% for profits over £250,000, with marginal relief for profits between £50,000 and £250,000.

Another benefit of paying yourself a salary is that it qualifies you for certain state benefits, such as the state pension, maternity allowance, and statutory sick pay, as long as you earn above the lower earnings limit of £6,240 per year.

However, the downside of paying yourself a salary is that it can be quite costly in terms of tax and NICs, especially if you earn above the higher rate threshold. You may also have to deal with more paperwork and administration, such as filing PAYE returns and issuing payslips.

Dividends

If you pay yourself dividends, you will have to declare them as income on your self-assessment tax return. You will also have to pay income tax on your dividends, but at lower rates than salary. The dividend tax rates for tax year 2023-24 are as follows:

• tax-free dividend allowance: up to £1,000

• basic rate: 8.5% on dividends between £1,001 and £37,700

• higher rate: 33.75% on dividends between £37,701 and £125,140

• additional rate: 39.35% on dividends over £125,140

The main benefit of paying yourself dividends is that they are not subject to NICs, which can save you a lot of money compared to salary. Another benefit is that dividends are paid out of your company’s after-tax profits, meaning that you do not have to pay corporation tax on them. However, this also means that dividends are not a tax-deductible expense for your company, so they do not reduce your corporation tax bill.

Another downside of paying yourself dividends is that they do not qualify you for any state benefits, such as the state pension, maternity allowance, or statutory sick pay. You also have to follow certain rules and regulations when paying dividends, such as having enough retained profits in your company, holding a board meeting to declare the dividends, and issuing dividend vouchers to shareholders.

How to Pay Yourself Efficiently

There is no definitive answer to the question of how to pay yourself efficiently as a limited company owner, as it depends on various factors, such as your personal and business circumstances, your income level, your tax position, and your future plans. However, a common strategy that many limited company owners use is to pay themselves a low salary up to the personal allowance or the NICs threshold, and then top up their income with dividends. This way, they can minimise their tax and NICs liabilities, while still benefiting from some state benefits and reducing their corporation tax bill.

However, this strategy may not be suitable for everyone, and it may change depending on the tax rates and rules in each tax year. Therefore, it is advisable to seek professional advice from an accountant or a tax adviser before deciding how to pay yourself as a limited company owner.

Frequently Asked Questions

Here are some of the most frequently asked questions related to paying yourself as a limited company owner:

• Can I pay myself in dividends only and have zero salary? Yes, you can, but this may not be the most tax-efficient option, as you will miss out on the tax-free personal allowance and some state benefits. You may also attract more attention from HMRC, as they may question whether you are really an employee or a shareholder of your company.

• How much dividend can I take out of my company? You can take out as much dividend as you want, as long as your company has enough retained profits to cover them, and you follow the proper procedures for declaring and paying dividends. However, you should also consider the tax implications of taking out large dividends, as they may push you into a higher tax bracket or affect your eligibility for certain tax reliefs and allowances.

• How often can you take a dividend from your limited company? You can take a dividend from your limited company as often as you like, as long as you have enough retained profits and you follow the proper procedures. However, most limited company owners take dividends either quarterly or annually, as this makes it easier to manage their cash flow and tax planning.

• Can you take dividends monthly? Yes, you can, but this may not be the most convenient or efficient option, as you will have to hold a board meeting and issue a dividend voucher every month. You may also have to pay more tax on your dividends, as they will be added to your income in each month, rather than in the whole tax year.

• What is the dividend allowance for 2023-24? The dividend allowance for 2023-24 is £1,000, which means that you can receive up to £1,000 of dividends tax-free in the tax year. Any dividends above this amount will be taxed at the dividend tax rates, depending on your income level.

• What is the maximum dividend tax free? The maximum dividend tax free is £1,000, which is the dividend allowance for 2023-24. However, you may also be able to receive some dividends tax free if they fall within your personal allowance or your basic rate band, depending on your income level and sources. You can reduce your tax liability on dividends by utilising your dividend allowance, your personal allowance, and your basic rate band, as well as by investing in tax-efficient vehicles, such as ISAs or pensions.

• Do dividends count as income? Yes, dividends count as income for tax purposes, and they are taxed differently from salary. You have to declare your dividends on your self-assessment tax return, and pay income tax on them at the dividend tax rates, depending on your income level and sources.

• Do you declare dividends on tax return? Yes, you have to declare dividends on your self-assessment tax return, even if they are within your dividend allowance or your personal allowance. You have to report the total amount of dividends you received in the tax year, as well as the amount of tax you paid or are due to pay on them.

We hope this article helps you understand the UK tax for business owners and how to pay yourself efficiently. But if you have any further questions or would rather prefer some personalised advise, please speak to us.

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